The Effects of Airspace Closures on Trade in the Aftermath of Eyjafjallajökull

35 Pages·2014·0.27 MB·English

The Effects of Airspace Closures on Trade in the Aftermath of Eyjafjallajökull
Tibor Besedeša, and Antu Panini Murshidb
aGeorgia Institute of Technology, School of Economics, Atlanta, GA 30332-0615, USA
bUniversity of Wisconsin-Milwaukee, Department of Economics, Milwaukee, WI 53211, USA

August 2014

Abstract
Over one half of the world’s GDP is transported across international borders. Given these extraordinary levels of
trade integration, we might conjecture that shocks to transportation networks could pose significant risks to
economies. However, assessing the effects of these shocks on trade volumes is difficult, because measures of the
size of the transportation network are correlated with innovations in the trade equation. This paper attempts to
quantify the effects of a temporary disruption to the air transportation network on trade volumes using the natural
experiment provided by the eruption of Iceland’s Eyjafjallajökull volcano in 2010. Ash from that eruption forced
cancellations to roughly one half of all flights originating and/or terminating in Europe between April 15 and April 22.
The immediate effect of this was to lower the volume of US-bound air freight by between 10.9% and 21.8%. Data on
Japanese imports reveal similarly sized reductions (between 11.9% and 27.5%) in air freight bound for the Japanese
market. By contrast, sea freight was not impacted either positively or negatively by the volcano. The implied
elasticities of imports with respect to flight cancellations are between -0.218 and -0.436 for U.S. imports, while that of
Japanese imports is slightly larger, ranging between -0.238 and -0.550.

JEL classification:
Key words: Trade; property rights.

 Corresponding author: Tel.:.+ 1 404 385 0512
E-mail addresses: [email protected]; [email protected]
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1. Introduction
If the metric is the volume of trade, the world is more globalized today than at any other time in history (Taylor, 2002).
In 2012, the value of merchandise trade was roughly $18 trillion (WTO, 2013)—just under a third of the world’s GDP.
This compares to a ratio closer to 20 percent during the last era of globalization prior to the outbreak of World War I
(Taylor, 2002). Although there are a number factors that can account for the extraordinary level of trade integration
today, the rapid growth of transportation networks facilitated by technological advances and declining costs, is
certainly amongst the more pertinent explanations. The expansion of the worldwide air transportation network in
particular, has been linked to the sharp growth in trade volumes in the post World War II era (Hummels, 2007). While
causality from transportation to trade may be suspected, identifying this relationship is difficult, as it is feasible that
the direction of causality runs the other way: from higher trade volumes to increased investment in transportation.
One identification strategy is to exploit the variation within data that accompanies occasional disruptions to
the transportation network. Some of these disruptions stem from naturally occurring events, as such their
occurrences are purely random. This provides opportunities for assessing the effects of disruptions to transportation
on trade. For instance, Volpe Martincus and Blyde (2013) used the Chilean earthquake in 2010 to identify the effect
of a rise in domestic transportation costs on export volumes, and Ye and Abe (2012) considered the impact on global
supply chains of the Great Tohoku earthquake and tsunami off the coast of Tohoku in 2011 and the flooding along
the Mekong and Chao Phraya basin in Thailand also in 2011.
Although the randomness of natural disasters provides a “handle” for facilitating structural inferences within
data, there may be a number of confounding effects, for which we cannot adequately control. In particular, natural
disasters are often accompanied by widespread damage and dislocation which can affect trade through other
channels. Hurricane Katrina is a case in point. Although the storm provided an exogenous shock to the transportation
network, the physical damage was not so confined. As a result production (and trade) fell independently of any
effects that were a direct consequence of the shock to transportation, making it difficult to isolate that structural link.1

1 The devastation caused to the Port of New Orleans, which was closed for seven months, as well as bridges, roads, and other
transportation undoubtedly impacted the flow of trade through the Gulf states. However, the post-Katrina decline in trade was not
wholly, or even necessarily primarily, the result of the diminished transportation infrastructure. Output losses, stemming from the
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This paper attempts to identify the impact on trade of a disruption to transportation, specifically one that
affects civil aviation, using a natural experiment that is relatively free of these confounding influences. Our analysis
centers on the eruption of the Eyjafjallajökull volcano in Iceland in 2010, which caused intermittent disruptions to air
traffic for a two month period. This event is interesting in that the disruption, though extensive, was confined to the air
transportation network, and was not associated with physical infrastructure damage and therefore less susceptible to
the types of confounding influences evident in many disaster-centric studies.
A mitigation of confounding factors, facilitated through an absence of physical damage, is rare, though
admittedly, not unique, to the eruption of Eyjafjallajökull. There have been other volcanic eruptions that have
disrupted air travel, with minor or negligible consequence for physical capital and infrastructure. At the same time,
non-natural disruptions, such as those caused by strikes and labor disputes, have also impacted transportation
networks, without any associated physical damage. However, what makes Eyjafjallajökull unique, is that the
disruption was both unexpected and extensive in its impact. Thus while the shock to air traffic caused by the eruption
of Grímsvötn in 2011, another Icelandic volcano, which erupted just a year after Eyjafjallajökull, was certainly
unexpected, it’s impact was relatively small--in total 900 scheduled flights were canceled. The size of the shock was
certainly too small to have a meaningful impact on trade flows. A far more significant shock to the air transportation
network, occurred during the Professional Air traffic Controllers (PATCO) strike in August 1981--all together 26,000
flights were cancelled between August 3 and August 8.2 However, since the PATCO strike was not unexpected,
exporters and importers had some scope to adjust the scheduling of shipments, which in turn complicates the
exercise of identifying the impact of that disruption to air traffic on trade.
By contrast the eruption of Eyjafjallajökull, like most volcanoes, was largely unpredictable leaving little time
for advanced planning.3 Moreover, the magnitude of the shock was significant. During its most disruptive phase, from
April 15 to April 22, Eyjafjallajökull forced closures of much of European airspace, resulting in 107,000 flight-
cancellations affecting 10 million passengers. The unpredictability of the eruption, combined with the magnitude of

temporary stops in the production and refinement of petroleum, as well as other disruptions, affected the volume of exports and
imports of oil and other internationally-traded commodities and goods and services.
2 FLRA decision: Case no 3-CO-105.
3 A search of the New York Times archive reveals that the first about the volcano were published on April 15, 2010 after closures
of European airspace were already in effect.
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the shock, and the lack of physical damage, are the bases for a “clean” natural experiment from which we can
identify the effect of the disruption to the air transportation network on trade.4
To this end, we use product-level data, observed at a monthly frequency, disaggregated by mode of
transportation. In particular, we use data on imports entering the US, which are available at the 10-digit HS level, as
well as data on imports entering Japan, which are available at the 9-digit HS level. In both cases, data on whether
merchandize entered by air or sea are available. Our focus on US and Japanese data is natural, since both countries
shared strong trade links with Europe, and any decline in trade volumes triggered by the volcanic eruption would be
concentrated with trading partners from that region. In March 2010 the U.S. was the top destination for the EU’s non-
European exports, accounting for 24% of all EU exports. Although the Japanese market for European exports was
significantly smaller (4% of EU exports were imported by Japan), it was still the third largest importer of EU
merchandize.5 Moreover, the choice of Japanese data offers a number of additional advantages that follow on
account of its geographic location. First, the use of Japanese data help illustrate that the closure of European
airspace was complete, in the sense that it affected virtually all air routes originating in Europe, not just those routes
passing close to Iceland, as all transatlantic routes between Europe and North America do. Second, since Europe is
a hub for global air traffic, the disruption caused by Eyjafjallajökull reduced not only trade between the U.S. and
Europe, but also between the U.S. and all countries which use Europe as a transit point for their exports to the U.S.
We can observe the former effect, but not the latter one as we have no information on which U.S. imports transited
through Europe. Japanese imports, on the other hand, are much less likely to be affected by such indirect transport
connections. Japanese imports from the Americas are unlikely to transit through Europe as are imports from much of
Asia. It is only imports from Africa which more than likely transit through Europe and those account for less than 2%
of all Japanese imports. Thus, our estimates of the effect of Eyjafjallajökull’s eruption on trade using Japanese import
data are much less likely to be polluted by our inability to observe the indirect effect of the airspace closure.

4 Another “natural” experiment, which was large in its impact and unexpected, but where the damage to physical capital was on a
relatively small scale, is the terrorist attacks on September 11, 2001. However, in the aftermath of those attacks, increased
uncertainty, as well as higher oil prices, were the primary influences on world output and trade rather than the disruption caused
by a temporary halt of US air traffic.
5 The second largest trading partner of the European Union is China, however high frequency product-level data for China,
disaggregated by mode of transportation were not available.
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We employ a difference-in-differences estimation strategy to estimate the effect of airspace closure on
trade. Although it is likely that U.S. and Japanese exports (that is, European imports) were impacted by the disruption
to air traffic as well, we confine our analysis to U.S and Japanese imports data only, because our identification
strategy is predicated on the assumption that after controlling for time-, country-, and product-level fixed effects, the
treatment group is essentially comparable to the control group. This assumption seems defensible for U.S and
Japanese imports, i.e., we might expect the import of a specific product to exhibit similar trends whether that product
originates in Europe (the treatment group) or elsewhere (the control group), because these trends are influenced, in
large part, by the same sets of determinants, such as the level of U.S. and Japanese economic activity and prices.
By contrast, the level of U.S. and Japanese exports depends on economic activity in their destination countries,
which may not be similar to those in Europe, the treatment group, thus creating an identification problem when using
the difference-in-differences estimator.
Our results suggest that the disruption to air travel had a significant, if uneven, effect on international trade.
A 50% decline in airline traffic--roughly the number of flights cancelled between April 15 and April 22--reduced U.S.
imports from affected countries by 10.9%–21.8% and Japanese imports by 11.9%–27.5%. These results suggest that
the elasticity of U.S. imports with respect to cancelled flights is between -0.218 and -0.436, while that of Japanese
imports is similar, between -0.238 and -0.550. Using imports from Europe shipped by sea as the control group, the
effect was as large as a 51.9% reduction in U.S. imports and 47.3% reduction in Japanese imports, implying
elasticities of imports with respect to cancelled flights as high as 1.038 and 0.946.
The effect of the disruption was unevenly distributed across industries as only 6 of 21 HS 2 sections show
significant reductions in imports. Textiles and textile articles and Machinery and mechanical appliances, electrical
equipment, television image and sound recorders and reproducers were the two import-categories showing the
consistent reductions in both U.S. and Japanese data across the various subsamples we use. Additionally US
imports of Base metals and Miscellaneous manufactured articles as well as Japanese imports of Pulp of wood and
recovered paper were consistently negative in our various regressions. In a methodological contribution, we show
that the effect of the disruption was sufficiently large to be detectable in data aggregated from thousands of products
codes to just 97 chapters of the 2-digit HS classification system. The implied reduction in U.S. imports in aggregated
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data is between 15.4% and 17.2% and between 8.5% and 14.2% for Japanese imports. Thus, aggregated data
reveal an elasticity of imports with respect to flight cancellations ranging between -0.308 and -0.350 for U.S. imports
and between -0.170 and -0.284 for Japanese imports.
This paper is related to a number of recent contributions to the trade literature that rely on natural
experiments to isolate the exogenous component of trade (see for instance, Feyrer, 2009 and Martincus and Blyde,
2013). However, unlike these earlier contributions to the literature, our analysis focuses on short-term disruptions that
impact trade only through its effects on transportation rather than through other channels, such as declines in
production levels. In addition, our paper illuminates the ability or lack thereof of the international transportation
network to deal with unexpected short term disruptions. Given the short run nature of the interruption and the lack of
infrastructural damage, our results could be interpreted as establishing the lower bound on the effect of disruption
caused by natural disasters in the short run.6
The remainder of this paper is organized as follows. Section 2 describes the impact of Eyjafjallajökull’s
eruption on European airspace, while section 3 describes our monthly trade data. In section 4 we describe our
empirical approach and present our findings. The last section offers some concluding remarks.
2. Eyjafjallajökull: It’s Impact on European Airspace
On March 20, 2010, the Eyjafjallajökull volcano, located on the southern tip of Iceland’s eastern volcanic zone,
erupted. Over a period of roughly six months, the eruption would progress through a number of stages. The first
stage, between March 20 and April 13 was characterized by a gentle outpouring of lava and the relative absence of
explosive activity (Sigmundsson, 2013).7 Lava reached the surface via a number of fissures on the flanks of the
volcano, in the relatively ice-free Fimmvörðuháls pass. This absence of ice and water and the effusive nature of the
eruption, ensured that the fallout from the volcano was confined to a relatively small area—about 1.3 km2 (British

6 Note that this is true even in the case of events such as hurricanes and earthquakes which usually have longer lasting effects
combined with infrastructural damage. It is precisely the infrastructural damage that creates the longer lived effect, but in the
short run our estimates may provide the lower bound since in the long run it is quite likely that both importers and exporters
adjust how they conduct trade. For example, while the Port of New Orleans was closed for months in the wake of Hurricane
Katrina it is unlikely that all international trade which used to go through the port was completely halted while the port recovered.
It is more likely that some or all of that trade was diverted to other ports of entry or exit.
7 On the volcanic explosivity index (VEI), the Eyjafjallajökull eruption on March 20 was estimated to be no more than 1 (Jenkins,
2010). The VEI is logarithmic, varies between 0 and 8, and assesses the explosivity by the volume of tephra ejected.
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Geological Survey, 2010). In fact, during this stage of its eruption, Eyjafjallajökull’s footprint was so small, it was
known locally as the tourist volcano (Jenkins, 2010).8
Following a brief hiatus, the eruption entered its second stage on April 14, with sustained activity until May
22 (Sigmundsson, 2013). This time the eruption occurred at the center of the Eyjafjallajökull glacier, at the caldera.
The presence of water vapor in the magma provided the impetus for an explosion that was roughly 20 to 30 times
more powerful than its predecessor three weeks earlier. The eruption generated an ash cloud that reached heights of
10 km (Gudmundsson et.al., 2012; Sigmundsson, 2013). Although half of the tephra, fragmental material ejected by a
volcano during an eruption, fell over Iceland, the remainder was distributed over a 7 million km2 area spanning much
of Europe and the North Atlantic (Gudmundsson et.al., 2012), resulting in the closure of much of Europe’s airspace
for a period of eight days and a cancellation of some 107,000 flights.
The eruption of Eyjafjallajökull was certainly not the only incident of volcanic activity to disrupt air traffic. The
eruption of Grímsvötn on Iceland on May 21, 2011, sent a plume of tephra 20km into the atmosphere, which resulted
in the cancellation of 900 flights between May 23 and May 25 (Learmount, 2011). Later that same year, an ash cloud
from the Puyehue-Cordón Caulle volcanic complex in Chile, led to airport closures in Argentina and as far afield as
Australia and New Zealand (Critchlow and Craymer, 2011). While the ash cloud following each of these events often
impacted very large geographic areas, the disruption to air traffic was relatively small. For instance the 900 flights
cancelled following the eruption of Grímsvötn represented one percent of total European traffic. By contrast, the
interruption of commercial aviation following the eruption of Eyjafjallajökull was orders of magnitude greater. This was
not because this eruption was particularly powerful. It was of modest size, as its “explosivity” during phase two
measured between 3 and 4 out of 8 on the volcanic explosivity index (Gudmundsson et.al., 2012). However, a
number of factors combined to magnify the scope of the disruption to air traffic. These included the fine-grained
nature of the ash, which was particularly dangerous to jet engines; the positioning of Eyjafjallajökull directly under an
unusually stable south-easterly jet stream, which helped spread the tephra over large areas of North and Central

8 An April 1, 2010 story in The Times of London described the Eyjafjallajökull volcano as a daredevil tourist attraction (Trippier,
Edward (2010), “Freezeframe in Iceland,” The Times, accessed on May 4, 2014,
http://www.thetimes.co.uk/tto/travel/images/article2468977.ece).
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Europe; as well as a zero-ash tolerance policy implemented by the International Civil Aviation Organization after
multiple incidents when volcanic ash interacted with jet turbines (Guffanti et al., 2010; Dunn, 2012).
The initial interruption to air traffic lasted eight days beginning on April 15, when roughly 27% of flights were
cancelled (Eurocontrol, 2010), and the airspace over Norway was completely shut down (Bye, 2011). The next day
the number of cancellations had increased to 60% and the day after the number of cancellations reached 78%. On
April 18, the disruption to air traffic reached its peak, with over 84% flight cancelled. Between April 17 and April 19,
1.2 million passengers were affected each day (Bye, 2011). Over the eight-day interruption to air traffic, about
107,000 flights were cancelled, impacting over 10 million passengers, which represented about 48% of total air traffic
during that period. Restrictions were lifted on April 22 after the introduction of new guidelines that raised the safe
level of volcanic ash density to 2000 micrograms of ash per cubic meter.
Besides Iceland, three countries were particularly severely impacted by air traffic disruptions. Finland was
the worst affected followed by Ireland and the UK. In each of these countries over 90% of flights were cancelled over
five consecutive days (Eurocontrol, 2010). After the initial eight-day shutdown between April 15 and April 22, some
intermittent closures of the European airspace followed as the volcanic ash density exceeded new safety thresholds.
Between May 4 and 5 and May 16 and 17 some restrictions were imposed on the airspace over the British Isles.
Additionally on May 9, there were partial closures of airports in Austria, Germany, Italy, Portugal and Spain. These
closures led to flight cancellations, but not on the scale observed during the first week of closures in April. In total
there were about 7000 flight cancellations in May (Eurocontrol, 2010), about 15 times fewer than in April.
By May 22 the eruption of Eyjafjallajökull had entered its third and final phase, which was marked by a
steady decline in eruption intensity, interrupted by only a minor explosive event between June 4 and 8 (Sigmundsson
et. al., 2011). No more flight cancellations resulted from this eruption.
3. Data Description
By affecting the extensive product margin of trade, the disruption to air traffic caused by the eruption of
Eyjafjallajökull, may have had some long-lasting effects. However the event itself was short-lived, as much of the
fallout stemming from it was concentrated over a relatively short window of time. Although annual trade statistics are
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usually the basis for empirical work, in the current context higher frequency data are necessary in order to precisely
estimate the impact of the airspace closures on U.S. and Japanese imports. Monthly data on U.S. merchandize
imports are readily available from the US Census Bureau, while those on Japanese imports are available through the
Japanese Ministry of Finance.9 These data provide a record of U.S. imports at the 10-digit HS level and Japanese
imports at the 9-digit HS level, the most disaggregated available data for either country. Crucially, for our purposes,
both data sets specify how much of any particular good, from any country, is transported by air, sea, or other modes
of transportation. We omit observations for which the mode of transportation is unspecified. In addition, we omit the
“other” mode of transportation classification, as this likely refers to trade carried by trains and trucks between Canada
and Mexico and the U.S. Japanese import data unsurprisingly provide data on air and sea modes only given that
Japan is an island nation.
Our data span a 36-month window, starting in January 2009, 15 months prior to the primary eruption of
Eyjafjallajökull, and extend to December 2011, 18 months after the primary eruption. While most of our analysis is
conducted using 10- or 9-digit product-level data, our results are robust to aggregating the data to the industry level,
defined as the 2-digit HS level. Such aggregation offers computational advantages as it limits the proliferation of fixed
effects in our regressions and speaks to the size of the effect of the disruption on trade as the effects are still
identifiable when data are aggregated from more than 17,000 10-digit product codes (almost 8,200 9-digit codes in
the case of Japanese import data) to just 98 2-digit industry codes. However, such aggregation makes it difficult to
examine the cross-industry variation of the effect of the eruption.
Data on flight cancellations on a country-by-country basis were obtained from Eurocontrol (2010), the
European Organization responsible for air traffic management. “Flight cancellations” actually refers to the change in
the number of flights from the week before. The interested reader should consult Eurocontrol (2010) for more detail
on how the cancellation figures were obtained by Eurocontrol. These data are available on a daily frequency during
the disruption. However, for our purposes we use the average number of flight cancellations during the 8-day
interruption in April to measure the intensity of the disruption on a country-by-country basis.

9 U.S. data are available either online or on monthly CDs/DVDs the Census Bureau makes available (U.S. Imports of
Merchandize). We used data provided on CDs/DVDs as the online data are not conducive to downloading large amounts.
Japanese data are available for convenient download at http://www.customs.go.jp/toukei/info/index_e.htm.
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3.1. An Overview of Trends and Cycles in Imports: January 2009 to December 2011
Figure 1 provides an overview of the main trends in aggregate and seasonally unadjusted US merchandize imports
broken down by mode of transportation. During our sample period, which begins in January 2009, the volume of
merchandize imports into the US increased by almost 50%. This dramatic expansion in trade followed a similarly
dramatic collapse brought on by the onset of the great recession. The rebound (in early 2009), driven by the recovery
in OECD economic activity (Francois and Woerz, 2009), did not appear to have a differential impact across modes of
transportation. Thus, the growth in US imports transported by air mirrored the expansion in shipments by sea.
Juxtaposed on the pronounced upward trend, are large month-to-month fluctuations in import volumes. Cycles at
seasonal frequencies are clearly evident within these data. For instance, sharp declines in imports, bottoming-out in
February, are evident in 2010 and 2011. The relative decline in import volumes in April is small in relation to the last-
to-first quarter decline in imports in 2010 and 2011.
2
25.
4
24. 25
U.S. imports by air24.124.224.3 24.825 U.S. imports by sea S. imports by air and sea24.5
6 U.
24 24.
24
9
23. 24.4
2009 2009 2010 2010 2010 2011 2011 2009 2009 2010 2010 2010 2011 2011
January July January April July January July January July January April July January July
air sea air sea

Figure 1- Seasonally Unadjusted U.S. Imports by Mode of Transportation
The trajectory of Japanese imports, shown in Figure 2, is quite the opposite having been declining since
2008. During our period of analysis, between January 2009 and December 2011, Japanese imports decreased by
43%, almost exactly the opposite of the growth of U.S. imports. While a good portion of this decrease is attributable
to the consequences of the Great Tohoku earthquake of March 2011, the Japanese imports were on the decline prior
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